The CBM Ownership Dispute

According to the Alberta Court of Appeal, in the early 1900’s, the Canadian Pacific Railway Company (the “CPR”) mistakenly viewed natural gas as a “worthless and noxious substance”1. During the ten year period between 1902 and 1912, the CPR sold farm-sized portions of its 25 million acre Dominion Government land grant to homesteaders reserving for its own account only coal, only coal and petroleum, or only coal, petroleum and valuable stone. As a result, the rights to natural gas and coal beneath significant portions of western Canada became split. After 1912, the railway company reserved all mines and minerals for itself.

The map below shows the location of the approximately 2.5 million acres of split title mineral rights in Alberta which arose as a result of the railway company’s land settlement policies.

In brown are lands where rights to coal were retained by the CPR; in red are lands where the rights to both coal and petroleum (and in some instances valuable stone) were retained. Split title lands also exist in the other western provinces.

EnCana Corporation (“EnCana”) and the Carbon Development Partnership (“CDP”) are the corporate successors to the coal rights retained by the CPR in the early 1900’s. Tens of thousands of individuals (typically the descendants of the original homesteaders) own the mineral rights not specifically reserved by the CPR, including natural gas in the case of the red lands and petroleum and natural gas in the case of the brown.Coal seams exist in the subsurface of much of western Canada. These coals seams contain vast quantities of natural gas or coal bed methane (“CBM”). The fact that these subsurface coals contain natural gas has been known for centuries – the lives of countless coal miners have been taken by the explosive mixture of air and natural gas in coal which was once known as ‘coal damp’.

Figure 1 - Burying the Dead, Coal Creek, Crowsnest Pass, 1902

The CPR was certainly aware of the existence of natural gas in coal at the time it sold homestead lands to pioneer settlers – an underground explosion in a coal mine in the Crowsnest Pass on May 22, 1902 took the lives of 128 coal miners – two days later, T.G. Shaughnessy, then President of the CPR, donated three thousand dollars to the relief fund for the dead miners’ wives and children. CBM first became an object of commerce in the United States more than 30 years ago. In response to the energy crisis of the 1970’s, the American government made adjustments to the taxation of unconventional natural gas in order to encourage its development. Large scale commercial CBM production in the United States began in the 1980’s and by the early part of the second millennium CBM production had grown to represent approximately 8% of total American natural gas production. The map below shows the principle areas of the United States where CBM is being produced and the cumulative production to the end of 2002 in billions of cubic feet (BCF).

Figure 2 - U.S. Coal Bed Methane Basins

The energy crisis of the 1970’s also resulted in a number of studies of the CBM potential of western Canada. Pilot CBM recovery projects were initiated in Alberta but the lack of tax incentives similar to those in the United States and the general gas bubble which existed in western Canada throughout the 1980’s and the early 1990’s hindered commercial development of the CBM resource. However, the potential value of CBM in western Canada had become apparent.

In 1991, the Energy and Resources Conservation Board (predecessor of the current Alberta Energy Regulator (formerly known as the “Energy Resources Conservation Board”) (collectively the “Board”) published Information Letter IL 91-11 in which it declared that the Alberta Energy Department and the AER (formerly known as the “ERCB”) “consider coalbed methane to be a form of natural gas”2

In 1993, PanCanadian Petroleum Limited (“PanCanadian”), the CPR successor corporation which merged with the Alberta Energy Company Ltd. in 2002 to form EnCana Corporation, changed the wording in the lease agreements under which it leased its petroleum or petroleum and natural gas to other energy companies in situations where it held title to coal and petroleum or coal, petroleum and natural gas. Prior to 1993, PanCanadian had exempted coal in these leases; in 1993, PanCanadian changed its exemption and began to exclude both coal and “natural gas derived from or associated with coal deposits”3.

If, as EnCana subsequently claimed, the word ‘coal’ in the CPR’s reservation includes ‘natural gas derived from or associated with coal deposits’ or CBM, why did PanCanadian deem it necessary to exclude both coal and “natural gas derived from or associated with coal deposits” in its natural gas leases? Did EnCana’s predecessor not share EnCana’s self-serving view of CBM ownership? Or, did PanCanadian recognize that CBM was natural gas and simply want to ensure that it retained CBM for its own account when it leased conventional natural gas to other industry operators? If PanCanadian believed its ownership of coal included CBM, why, in light of Information Letter IL 91-11, did it take no legal action to enforce its claim?

In early 2002, PanCanadian established the first commercial CBM production in Alberta. PanCanadian was, and EnCana is, one of the leading developers of CBM in Canada. One would think that if PanCanadian and EnCana really believed that their ownership of coal included CBM beneath split title lands, they would have initiated litigation by 2002 to legally confirm their ownership. In 2003, the Supreme Court of Canada granted the Freehold Owners Association leave to intervene in a hearing to determine the ownership of hydrocarbons produced from wells on split title lands. Coal bed methane is composed almost entirely of hydrocarbons, yet when FHOA attempted to have the Supreme Court include the ownership of CBM produced from split title lands in its deliberations, EnCana successfully opposed FHOA’s efforts.

Perhaps PanCanadian and EnCana recognized that their claim to CBM as coal owners had very little legal merit and thought that their business interests could be more effectively advanced outside the judicial system.

The mineral rights acquired by the CPR from the Dominion Government in 1881 and by the Alberta Energy Company Ltd. from the Alberta Government in 1975 form the foundation of EnCana Corporation. One might think that a company which owes so much to the taxpayers of Canada and Alberta would be satisfied with its good fortune – not so! Once it became apparent that CBM had commercial value, EnCana (and CDP) threatened to sue any CBM developer that produced CBM from a gas spacing unit (a section) which included split title mineral rights unless a CBM sharing agreement had been negotiated with the coal owners.

The map below shows the aerial distribution of the subsurface coals deemed most prospective for commercial CBM exploitation by the Alberta Geological Survey (the “AGS”). According to the AGS there are 14 trillion cubic meters (e12m3) or 500 trillion cubic feet (Tcf) of CBM in place in the coals of southern Alberta4.

To put this in perspective, the Board estimates that 9.2 e12m3 or 327 Tcf of in place ‘conventional natural gas’ reserves had been discovered in Alberta to the end of 20105. In other words, Alberta’s CBM resource is almost twice as large as the Province’s conventional natural gas resource.

In 2003, the Government of British Columbia passed legislation declaring CBM to be the property of the gas owner beneath both Crown and freehold mineral rights. The Government of Alberta also introduced legislation effectively declaring that CBM was natural gas in 2003, but the Alberta Government’s legislation only applied to CBM beneath Crown lands. The ownership of CBM beneath freehold lands was left in limbo.

Faced with the coal owners’ threats of litigation if they produced CBM from spacing units including split title freehold, CBM developers focused their efforts almost entirely on Crown lands.

Based on their unsubstantiated claims to CBM ownership, in late 2004 and early 2005 EnCana (and CDP) objected to the Board’s issuance of certain approvals, including well licenses, to CBM developers who had leased natural gas from the owners of the natural gas and intended to produce CBM from sections of land which included split title freehold. The Board initially dismissed the coal owners’ objections6. The coal owners then applied for a review and variance of the Board’s dismissal7. In March of 2006, the Board agreed to hold a review8 and, on May 30, 2006, the Board issued Bulletin 2006-19.9

Under the terms of Bulletin 2006-19, a moratorium was placed on the issuance of licenses for wells to produce CBM from sections of land which included split title mineral rights unless the concerns of Encana and CDP, as coal owners, were addressed, pending the Board’s decision in a hearing called by the Board to determine the legal entitlement to CBM produced from wells drilled on sections of land which include split title freehold (Proceeding 1457147).

Compare this to the Board’s response in 1949 when Michael Borys, claiming that his ownership of land subject to the CPR’s reservation of coal and petroleum included any natural gas beneath his lands, objected to the Board’s issuance of a well license to Imperial Oil Limited who had leased the CPR’s petroleum rights and intended to produce petroleum and natural gas from Mr. Borys’ lands. In 1949 the Board issued the well license to Imperial and Mr. Borys was forced to go to court to prove his ownership (see “1950-53: Borys v. CPR and Imperial Oil Limited”).

FHOA sought and, over EnCana’s objections, was granted leave to intervene in Proceeding 1457147. Verbal testimony was heard by the Board in October, 2006. Written legal arguments were submitted in December, 2006. Contrary to the procedure which had been agreed to, EnCana and CDP submitted further written legal arguments in January, 2007. This forced the natural gas owners to submit additional written legal arguments rebutting the coal owners’ new positions.

FHOA’s principal submissions10 were that:

• EnCana was using the regulatory process to prevent individual freehold owners of natural gas and their lessees from developing CBM. This precluded the orderly and efficient development of CBM, was not in the public interest, and allowed the coal owners to advance their business interests at the expense of the legitimate owners of the resource;• the critical temperature of methane is minus 83 o centigrade and consequently, under the temperatures and pressures that prevail in the subsurface, CBM could only exist as a gas; • the 1953 Borys decision (Borys v. CPR and Imperial Oil, J.C.P.C. [1953] 2 D.L.R. 65), as affirmed by the Supreme Court of Canada in 2004 (Anderson v. Amoco, S.C.C. [2004] 3 S.C.R.) was authority for the substance which is found in the form of gas in situ not being the subject of the CPR’s reservation of coal and petroleum; • Borys was also authority for the vernacular or common meaning of words in a reservation prevailing over the scientific meaning; and • the common meaning of coal in the early 1900’s was the same as it is today – a solid brown or black rock not including gas. The United States Supreme Court has ruled as such in a similar dispute (Amoco Production Co. v. Southern Ute Indian Tribe et al.,[1999] 526 U.S. 865).

On December 22, 2006, Alberta Energy posted new material on its web site ostensibly to make Crown lessees, freehold owners and industry aware of the risks and associated impacts of split title ownership11. In this material Alberta Energy stated that: “It is the position of the Alberta Government that if an individual freehold owner of natural gas or the owner’s lessee cannot negotiate an acceptable CBM sharing agreement with the coal owner, the freeholder or the freeholder’s lessee can seek a court ruling on ownership.”

This position mirrored the position advanced by EnCana and CDP both prior to and during Proceeding 1457147. FHOA considered it highly improper for Alberta Energy to publish a position effectively supporting one side of a dispute being heard by a tribunal whose members are appointed by the Alberta Government before the tribunal announced its decision. FHOA wrote to Alberta Energy asking the department to remove this material. FHOA re-iterated its request in a meeting with former Alberta Energy Minister Mel Knight in early March, 2007. The material remained on the Energy Department’s web site.

On March 28, 2007, the Board released its ruling in Proceeding 145714712. The Board lifted its moratorium on granting approvals, including licenses for CBM wells on sections including split title lands, and ruled that:

• subsurface coal is a rock in which CBM is stored;• CBM is a form of gas that is gaseous and distinct from coal at initial in situ conditions;• the vernacular meaning of coal at all material times was a “solid black or blackish combustible rock and does not include CBM”;• the CPR’s reservation of coal included only hydrocarbons in solid phase; • CBM was transferred to the early settlers by the CPR; and • a valid lease of natural gas from the homesteaders’ successors constitutes satisfactory evidence of entitlement to produce CBM for the EUB’s purposes in granting well licenses, irrespective of the coal owners’ objections.

Alberta Energy did not change the content of its website in response to the Board ruling.

The Board has exclusive jurisdiction to decide technical oil and gas factual matters. In FHOA’s view, the Board’s finding that CBM is gaseous and distinct from coal at initial in situ conditions in combination with the Supreme Court’s 2004 ruling in Anderson v. Amoco that the substance which is found in the form of gas in situ is not the subject of the CPR’s reservation of coal and petroleum should have decided the issue.

However, the Board does not have the authority to determine legal ownership and Board decisions can be appealed to the Alberta Court of Appeal on questions of law or jurisdiction. In November of 2007 the Court of Appeal granted EnCana and CDP leave to appeal the Board decision. FHOA sought and was granted leave to intervene.

In response to FHOA’s correspondence and meetings with members of the Alberta Legislature, MLA Ray Prins and former Cabinet Minister Ty Lund introduced a private members bill vesting ownership of CBM in the hands of the natural gas owner in early 2008. The bill had the backing of the Liberal and ND opposition and a number of Conservative MLA’s. Unfortunately, this bill died on the order paper when an election was called in the spring of 2008.

The Court of Appeal had scheduled the hearing of the coal owners’ appeal of the Board decision for early November, 2008. In late September, Alberta’s Minister of Justice and Attorney General advised the parties that Alberta intended to seek leave to intervene in the hearing on Constitutional grounds. In early October, 2008, the coal owners abandoned their appeal. However, by this time EnCana had initiated a number of legal actions in the Court of Queen’s Bench of Alberta seeking to establish its ownership of CBM. EnCana continued to pursue these actions and, despite the Board ruling and the coal owners abandoned appeals, the CBM ownership issue remained unresolved.

The map below shows in red the distribution of the more than 21,000 wells which have been drilled for CBM in the decade ending in the spring of 2012.

The vast majority of these wells have been drilled for production of CBM from the Horseshoe Canyon formation in the area of the Province outlined in blue on the AGS map set forth previously. Within this ‘CBM fairway’ between Calgary and Edmonton along the 5th meridian Crown mineral rights are checker-boarded with freehold mineral rights. The impact of the threats of the coal owners and of the Government of Alberta’s legislation which clarified CBM ownership but only beneath Crown lands can be seen on the map below of a township of land within the CBM fairway. The township has been chosen because there are equal numbers of Crown and freehold sections. At the time the map was printed there were 65 wells producing CBM from the 18 sections of Crown (shown in white), 4 wells producing CBM from the section of freehold which contained no split title mineral rights (yellow) and 4 wells producing CBM from the 17 sections of freehold which included at least a quarter section of split title freehold (brown and red). Presumably the CBM developer on this split title section had negotiated some form of CBM sharing agreement with the coal owner.

Coal seams do not stop at the edges of Crown sections and many of the CBM wells on Crown lands were drilled close to the north and east fence lines of the sections immediately adjacent to undrilled freehold mineral rights pursuant to holding applications granted by the Board or the corner target area policy announced by the Board in 2006 (see “Target Areas”).

FHOA sat on the Multi-Stakeholder Advisory Committee on CBM initiated by Alberta Energy in 2003. Most of the issues raised by FHOA during the ‘MAC’ meetings were deemed to be ‘out of scope’ however FHOA did succeed in having Recommendation 6.2.2 included in the Committee’s Final Report issued in 200613. This recommendation called for the Alberta Government to “facilitate parties coming together to work toward resolution of split-title ownership issues” . In 2009, MLA Len Webber, then Parliamentary Assistant to the Energy Minister, was instrumental in arranging a stakeholder consultation to address this recommendation and a number of other issues raised by FHOA. A report on this consultation was released in May of 2009 (see “May, 2009 Stakeholder Consultation Report”). In 2009, FHOA also met with the Calgary Caucus, the Rural Caucus and the Capital Region Caucus of the Progressive Conservative MLA’s and urged the Government to bring forward legislation to resolve the CBM ownership dispute (see “Capital Region Caucus, May, 2009”).

These meetings and the CBM Ownership Petition fostered by FHOA and signed by thousands of freehold owners and concerned citizens finally bore fruit in the fall of 2010 when the Alberta Government passed Bill 26, the Mines and Minerals (Coalbed Methane) Amendment Act, 2010. This act clarified that CBM mineral ownership is and has always been natural gas, for both Crown and freehold minerals, providing certainty in split title situations. In 2011, a Court of Queen’s Bench judge, in reliance on Bill 26, issued summary judgment dismissing the legal actions brought by EnCana in situations where it claimed CBM had not been leased when it leased natural gas. In 2012, the Alberta Court of Appeal upheld the trial judge’s ruling.

FHOA is proud of the role it played in resolving the CBM ownership dispute in favour of the individual owners of split title natural gas rights. Sadly however it took far too long.

During 2nd reading of Bill 26 in the Legislature, Energy Minister Liepert stated as follows:

“In fact, back in 2003 the hon. Member for Edmonton-Gold Bar (Liberal MLA Hugh MacDonald) stated that Alberta needed to take a lead role in the development of our CBM by removing the uncertainty that surrounds entitlement to coal-bed methane underlying Crown and freehold lands in this province. I'm pleased to say today that we are pretty much doing what the member suggested back in 2003 ...”

By the time the dispute was resolved, the price of natural gas in Alberta had declined to the lowest level in a decade. Notwithstanding the legislation resolving the CBM ownership uncertainty and the dismissal of the coal owners’ legal actions, natural gas price declines have rendered drilling for CBM on freehold lands uneconomic. Wells producing CBM from Crown lands offsetting freehold mineral rights continue to produce and continue to drain freehold mineral rights.

While commending then Energy Minister Ron Liepert for bringing forward Bill 26, in FHOA’s view it should not have taken a new Energy Minister and seven years for the Alberta Government to have done what MLA MacDonald requested in 2003.